Answer to Question #200569 in Microeconomics for Syed Usman Hikmat

Question

Q8) The following table provides you the estimated price, cross, and income elasticities for preferred commodities. Indicate from the price elasticities (e) if the demand is elastic or inelastic; from the cross elasticities (exy) if the commodities are substitutes or complements; and from the income elasticity (eM) whether the commodity is a luxury, a necessity, or an inferior good.

Price Elasticity of Demand (e)

Beef

0.92

Potatoes

0.31

Sugar

0.31

Electricity

1.20

Restaurant Meals

2.21

Cross Elasticity of Demand (exy)

Beef, Mutton

0.28

Tea, Coffee

0.67

Coke, Pepsi

-0.61

Sugar, fruits

-0.28

Electricity, natural gas

0.2

Income Elasticity of Demand (eM)

Butter

0.42

Margarine

-0.20

Air Coolers

0.35

Utilities

0.20

Burger       o’ Clock

1.48

Answer 1

Price elasticity of Demand

If the value of price elasticity is greater than unity, then demand is elastic.

If the value of price elasticity is less than unity, then demand is inelastic.

Cross elasticity

If the value of cross elasticity is positive, the goods are substitutes.

If the value of cross elasticity is negative, the goods are complements.

Income elasticity

If the value of income elasticity is greater than unity, the good is a luxury.

If the value of income elasticity is less than unity, the good is a necessity.

If the value of income elasticity is negative, the good is an inferior good.